What Is Earned Income & the Earned Income Credit?

Money received as a work payment, including salaries, wages, commissions, bonuses, net earnings from self-employment, and tips, is known as earned income. Considering this, the Earned Income Credit (EIC) or Earned Income Tax Credit (EITC) helps taxpayers get a tax break. It is designed for those individuals in the US who have low-to-moderate income.

Want to know more about these two terms and who qualifies for the earned income credit (EIC)? Then you are on the right destination. Read the blog and get your answers.

What Is Earned Income?

As mentioned above, the money you received in response to your services and work is known as earned income. It includes salary income, wages, tips, commissions, bonuses, and net earnings from self-employment. For tax purposes, it can also involve long-term disability payments, benefits from a union strike, and more.

It does not include money you received from Social Security payments and investment profits. These are known as unearned income. It is also called passive income.

Under the federal government taxes, the earned income is taxed at seven rates, ranging from 0% to 37%. Every year, for account inflation with different income ranges, the government adjusts the income levels.

This was all about what is considered earned income in the US. Moving ahead, let's know about the tax considerations.

Tax Considerations

Identifying whether the money you received is earned or unearned and filing the correct forms, like Form 1040 or Form 1040-SR, is simple. However, for some individuals, to consider other earned income factors is vital.

For instance, if you are getting Social Security benefits, on a portion of those benefits, you need to pay tax. However, for this, your annual income should be more than the specific limit. In this scenario, up to 50% or 85% depending on your annual income and filing status, you will have to pay tax on them.

For individuals, constantly working past the minimum to get Social Security benefits, it is a vital consideration. In case you are self-employed, you need to know how much income you expect to receive in a specific year. It includes both earned and unearned income and pays the estimated tax amount quarterly.

In case you fail to fulfill your tax liability, you need to pay up when you file your annual IRS return. Additionally, at the time of payment, you also need to pay the charges of late tax filing.

This is how tax is considered. Moving further, let's know the different types of earned income that qualify for EIC.

Types of Earned Income

There are different types of earned income, as many taxpayers have more than one income source in the US. To provide you with an idea, below are some examples of it.

• Salaries/Wages: These are the most common earned income types. Individuals receive this money in exchange for their work and services. In many cases, payment is made to labor, whether salary or hourly, and is stated as earned income.
• Self-Employment Income: For people who work for themselves or as contractors, the money they receive is known as earned income. Self-employed people include consultants, small business owners, and freelancers.
• Bonuses: These incomes are generally received by individuals for their work performance or achieving milestones. These earned incomes are non-guaranteed payments. Bonuses are additional compensation other than wages and salaries it is also counted in earned income.
• Commissions and Tips: These are incomes that you receive in addition to your regular wages or salary. Commissions are often received by salespeople while in the service industry, and tips are a general thing.
• Honorarium: These payments are received for services when you participate in a convention or speak at an event. In exchange for your speaking service, you are getting payment, which is also counted as earned income.
• Long-term Disability Benefits: These benefits are claimed before completing the minimum age of retirement. Additionally, it may qualify as your earned income.

These are the different types of income that are considered earned income in the US. Moving ahead, now let's know about the earned income tax credit.

Earned Income Tax Credit (EITC)

The Earned Income Tax Credit (EITC) is for those individuals whose annual income is less than a certain threshold. Through this, the federal government provides a refundable tax credit on your income tax that reduces or tax liability. In addition, it helps you get a tax refund on your paid taxes during the year.

Depending on the size of your family and your IRS filing status, the credit amount and income level vary. Also, to get the earned income credit, you need to file your IRS return even if you do not owe any tax. Apart from this, you should have been employed for more than a year.

The EITC was introduced by the US government for low-income workers. In simple words, you can say it's a type of work bonus that adds to the income of workers. Further, it encourages work and reduces the impact of Social Security taxes. Many low-income people see it as an anti-poverty tax benefit.

This is what an earned income credit is. Moving further, let's know who qualifies for the earned income credit.

Who Qualifies for Earned Income Credit?

To be qualified for the earned income tax credit, you need to be employed during the year. Also, the income you received should be less than a certain threshold limit. The amount of tax credit you received depends on your marital status and the number of dependents.

For instance, if A is married, he earned less than $66,819, and filed jointly in 2024, he qualifies for EIC or may receive a refund check. These income limits are increased from $63,398 for those who file as married filing jointly for 2023.

Further, on any federal income tax you owe, this credit reduces the tax, dollar-for-dollar. In case all your tax bill is eliminated by the tax credit, and some credit is still left. In this scenario, for your remaining amount, you receive a cash refund.

Apart from this, you also need to fulfill the following criteria:

• All year, you should be a U.S. citizen or a resident alien.
• You have income from earnings such as from your own business, job, union strike benefits, or more.
• The income you received from your investments and dividends should not be more than $11,600.
• Should have a valid Social Security number.
• You and your spouse should not be the qualified child of someone else.
• Do not fill out Form 2555 to claim a tax refund on foreign-earned income.
• In case you are separated from your spouse, you need to qualify for certain rules and should not file a joint tax return.
• You have dependents by your side. In case you do not have them, you should be 25 or more than that but less than 65 years old. Also, you are not classified as dependent on another person and have lived in the US for more than half a year.

These are the eligibility criteria that you need to fulfill to be eligible for the earned income credit. Moving ahead, let's know how much you can earn and still qualify for EIC.

How Much Can I Earn and Still Qualify?

As mentioned above, the earned income tax credit targets people who have a lower income than the basic threshold. So, if your income is too high, you do not qualify for this tax credit. How much you earn and are still eligible for EIC depends on how many eligible children you have.

Individuals with the lowest income receive the biggest tax credit. Additionally, people who have more income than the phase-out threshold get lower credits. These rules are imposed in order for many households, specifically those that have three or more qualifying children.

Confused? Have a look at the table below. It shows the income limits for 2024, getting credits, along the maximum amount of credit.

The above table shows how much you can earn and still be qualified for the earned income credit. Moving further, let's know the conditions when children qualify for the EIC.

Does My Child Qualify for Earned Income Credit?

To qualify for the earned income tax credit, the child should be:

• Your daughter, son, stepchild, descendant, or adopted child.
• A foster child has been with you by a court order or authorized agency.
• Your sister, brother, stepsister, stepbrother, or a descendant of one of these.
• The age of the child at the end of the year should be 18 or less than that. If the child is a full-time student, they should be 23 or younger.
• A person who is totally and permanently disabled, no matter how old, also qualifies for EIC.
• A resident in the US living with you for more than half a year.

The above-mentioned points make a child qualify for the earned income tax credit. Let's better understand this with an example.

Illustration

Consider A and E are brothers who live together. A is 28 and E is 14. Two years ago, their parents died, and from that time, A has been taking care of E. However, he does not legally adopt his brother. In this scenario, E will still be qualified for EIC, as he has lived more than half a year with A.

Furthermore, in the case of a foster child is a person who, by court order or an authorized agency placed with you. To qualify for EIC, this child needs to stay with you for more than half a year.

These are some of the qualifications that make a child eligible to get EIC. Furthermore, let's know the welfare benefits under EIC.

Welfare Benefits Under Earned Income Credit

The earned income tax credit (EITC) does not affect the welfare benefits you receive. Under EIC, any refund you received is not stated as income. Additionally, this income is not even determined when you receive the tax benefits from the following program. The welfare program includes:

• Food Stamps
• Temporary Assistance for Needy Families (TANF)
• Low-income housing
• Medicaid and Supplemental Security Income (SSI)

So, without compromising your welfare benefits, if you qualify for EIC, apply for it and reduce your tax burden.

Final Thoughts

Earned income is compensation that individuals receive from their work or self-employment. If your earned income is less than a certain threshold, then you qualify for the earned income credit. It helps you in reducing your tax burden on your earned income and getting a tax refund if available. Here, the complete blog was about that. Hope that after reading it, you understand how it benefits individuals with lower income.

Furthermore, if you need more details about it or want to apply for it EIC, connect with Savetaxs. Our experts will provide you with detailed information on EIC. Additionally, they also help you in applying for EIC and reducing your tax liability. So contact us now and simply decrease your tax burden.